Mexico’s Budget Cuts Prompted by Oil’s Drop, Financing Outlook

Deputy Minister Says the Hope Is to Narrow Deficits in Future Without Raising Taxes

By

Anthony Harrup

Feb. 6, 2015 1:44 pm ET

MEXICO CITY—Cuts to Mexico’s 2015 budget are a step toward ensuring the government will be able to narrow its deficits in coming years without increasing taxes, and start lowering public debt-to-GDP levels beginning in 2017, Deputy Finance Minister
Fernando Aportela
said.

The government last week unveiled spending cuts of some $8.3 billion this year as a preventive measure, given the sharp drop in oil prices and the likelihood that financing will become harder to obtain, particularly as the U.S. Federal Reserve is expected to begin raising interest rates.

Mr. Aportela said in an interview Thursday that the oil price hedges taken out for 2015 were enough to cover the federal government’s exposure to oil prices, but don’t cover lower-than-expected crude output by state oil company Petróleos Mexicanos. Pemex, which will make half of this year’s budget cuts, reported crude production of 2.25 million barrels a day in January, below the 2.4 million budget estimate.

The main challenge for the government, which relies on oil money and related taxes for almost a third of revenue, will come in 2016 as oil prices are expected to remain low. “It was important to start now…as a preventive measure to strengthen macroeconomic conditions,” Mr. Aportela said.

Bank of America Merrill said that assuming Mexican crude averages $52 a barrel in 2016, the revenue shortfall next year could be around 1% of GDP. Mexico’s oil price was $46.10 on Thursday.

Mexico’s fiscal deficit of 4% of GDP includes the federal government deficit, financed investment at state enterprises such as Pemex, and liabilities of development banks. The federal government still intends to lower its deficit to 1% of GDP this year from 1.1% in 2014, then cut it further to 0.5% in 2016 and zero in 2017, Mr. Aportela said. Pemex’s financing needs, which have averaged around 2% of GDP in recent years, are likely to diminish as the state company can form joint ventures with private companies under new energy laws.

Overall public sector debt rose in 2014 to 41% of GDP, up from 39% the year before, raising concerns among some analysts. This year’s budget cuts and plans to review 2016 spending seek to stabilize the level this year and next, and start lowering it as of 2017, Mr. Aportela said.

The government is conducting a public expenditure review with the World Bank to find ways to make its spending more efficient. The Finance Ministry is due to publish a preliminary outline of 2016 budget estimates at the end of March.

This year’s spending reductions “may be viewed as a pre-emptive measure, allowing for shallower cuts and a smoother transition in 2016,”
Barclays
economist
Marco Oviedo
said in a note.

A number of economists cut their economic growth estimates for this year as a result of the budget cuts, while noting that the impact is likely to be small.

Eleven of the 25 analysts surveyed this week by Citi unit Banamex cut their GDP forecasts, reducing the average estimate to 3.2% from just under 3.4%. The government is projecting growth between 3.2% and 4.2%, up from an expected 2.2% for 2014.